The PPP and EIDL loans obtained by restaurants in 2020 will present some unusual tax consequences to restaurant owners on their 2020 and 2021 taxes.
Both the PPP and the EIDL are considered loans.
When you received your EIDL money, that was a loan for tax purposes and has the same consequences on your taxes as a bank loan. The interest is deductible and the principle is paid from profits.
The rub will come in when, and if, the PPP loan is forgiven.
To begin the story, we need to lay the groundwork. You applied for the PPP money and the EIDL loans to pay bills (mostly payroll) during the COVID shut-down and restrictions in 2020. That money was a God-send for most restaurants as it allowed you to stay open and pay your bills.
But borrowing money to pay bills implies that you will have losses for tax purposes otherwise you would have used normal sales to pay bills. If you used up your PPP and/or EIDL monies to fund operations in 2020 then you probably will have tax losses for 2020. Losses for some restaurants may be substantial for 2020.
If you broke even in 2020 and did not need the loan money to fund operations or you actually had profits even without using loan money then you probably will have profits for tax purposes in 2020.
The complications start when the PPP money is forgiven. Under current law, once forgiven, that money becomes taxable income. Based on the forgiveness timetable as published by the government, PPP forgiveness will not come until 2021.
This will mean some restaurants will have large losses in 2020 and possible huge profits in 2021 as the PPP money is forgiven (and becomes taxable) and your sales rebound.
Having big losses in 2020 for tax purposes is not necessarily a bad thing. We can carry those losses back and forward to obtain refunds of previously paid taxes. But, as stated above, if the PPP loans are forgiven, that could mean big taxable profits in 2021.
This is something you should be aware of and talk to your tax preparer at Kallas to consider how it affects you.
To add to the story, part of the negotiations going on now in Washington include making the PPP forgiveness non-taxable. Our best guess at this point is that nothing will pass until after the election but If the non-taxability of forgiveness passes it will be a huge boon to restaurant owners because it will become tax-free.